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UK interest rates are set to increase to 5% by the end of next year, the markets believe, with a 0.25 point hike possible as early as April. Surging house prices, credit growth and record levels of mortgage equity are impinging on current interest rate levels. Some economists are warning strong money-supply growth may lead to a resurgence of inflation in a few months, while others are warning this may happen due to surging government borrowing and spending.

The Bank of Englandâ€™s monetary policy committee (MPC) appears be split on whether to raise base rates. One camp will call for an immediate increase to cool the housing market and consumer debt, while the other will argue for delaying until May to maintain the bankâ€™s gradualist approach. Analysts said the decision was on a knife-edge, but they lent marginally to a delay in raising rates, despite figures showing strong rises in house prices.

Analysts said the bank needed to shock consumers by raising rates aggressively. However, Mervyn King, the bankâ€™s governor, has ruled out such a strategy. His vote could be the deciding factor.

The housing marketâ€™s renewed strength has been confirmed with two indices showing prices kept rising during March.

Halifax said house prices grew by 18.5% last month compared with a year earlier, the fastest annual rate since September. The figures â€“ coming just after Nationwide reported annual price rises of 16.7% and revised up its forecast for this year to 15% â€“ are likely to increase pressure on the Bank of England to raise interest rates.